Barriers and opportunities
- Developing Know Your Client (KYC) and Due Diligence material
From a private sector engagement standpoint, a project like EmPower aggregates private entrepreneurs, such as women-driven SMEs and technical providers, while producing relevant information for KYC and due diligence procedures. It also provides technical assistance through the financial literacy training. This could be leveraged by any FI throughout its internal credit assessment. A financing mechanism could leverage these aspects of EmPower, by sharing information with selected FIs. That would be particularly welcome by FIs who report that when they themselves proposed financial literacy training as an eligibility criterion, potential borrowers tend to find other “less demanding” sources of funding.
- Considering flexible guarantees
Given that some potential borrowers might struggle with providing either a Guarantor or collateral for the loan, EmPower, through its local partner (NCDDs), would provide the needed guarantee through either a cash-backed or guarantor scheme, helping the merits of the project to overcome entrepreneurs’ constraints.
However, the interviews with FIs suggested different realities in terms of guarantee. While some consider that if there is a buy-and-back guarantee from the Technical Provider, they can accept equipment as collateral, others emphasized the legal constraints to monetizing these types of assets.
So, flexibility is another important aspect of a financing mechanism, as it allows the mechanism to operate with or without a cash-backed guarantee, with different types of Guarantors (public or private) and to sponsor either livelihoods or, for example, technical providers.
- Adopting inclusive collateral
Another important concept introduced by Nexus’ financing mechanism proposal is the one of “inclusive collateral”. Inclusive collateral comprises collateral that FIs are often reluctant to accept (or value poorly), such as moveable assets (e.g. sponsored equipment), forecasted revenues, and the concept of household assets (i.e. having women benefiting from their household’s assets, even if they do not have legal ownership). A guarantee mechanism would allow FIs to test these inclusive assets without altering their risk perception of the project/ borrower, while addressing the fact that lack of collateral is perceived as a barrier by women entrepreneurs. Lower collateralization could also be considered.
This said, some FIs interviewed when developing the financing mechanism mentioned that they are not just looking for guarantee schemes, but also for funding when proposing new deals, so it is important to keep in mind that sometimes projects need to come with funding to be considered interesting by the FIs.